Abstract

This paper links IPO underpricing with the benefit of going public from the loan market. We show that IPO underpricing is associated with significantly lower borrowing costs of the issuer after going public. The average reduction in the loan interest spread for firms with above-median IPO underpricing is about 23.7% of their pre-IPO loan spreads, which almost doubles the 12.6% reduction for firms with below-median underpricing, after control for firm and loan characteristics, and important factors that affect IPO underpricing. This larger reduction in borrowing costs amounts to about U.S. $0.79 billion per year for our sample firms, which is substantial relative to the total amount of money left on the table due to higher underpricing (U.S. $21.06 billion). Our findings provide a new explanation for why issuers don't get upset about IPO underpricing.

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